Faculty Bibliography

Trustees of pensions, charities, and personal trusts invest tens of trillions of dollars of other people’s money subject to a sacred trust known in the law as fiduciary duty. Recently, these trustees have come under increasing pressure to use environmental, social, and governance (ESG) factors in making investment decisions. ESG investing is common among investors of all stripes, but many trustees have resisted its use on the grounds that doing so may violate the fiduciary duty of loyalty. Under the “sole interest rule” of trust fiduciary law, a trustee must consider only the interests of the beneficiary. Accordingly, a trustee’s use of ESG factors, if motivated by the trustee’s own sense of ethics or to obtain collateral benefits for third parties, violates the duty of loyalty. On the other hand, some academics and investment professionals have argued that ESG investing can provide superior risk-adjusted returns. On this basis, some have even argued that ESG investing is required by the fiduciary duty of prudence. Against this backdrop of uncertainty, this paper examines the law and economics of ESG investing by a trustee. We differentiate “collateral benefits” ESG from “risk-return” ESG, and we provide a balanced assessment of the theory and evidence about the possibility of persistent, enhanced returns from risk-return ESG. We show that ESG investing is permissible under trust fiduciary law only if two conditions are satisfied: (1) the trustee reasonably concludes that ESG investing will benefit the beneficiary directly by improving risk-adjusted return, and (2) the trustee’s exclusive motive for ESG investing is to obtain this direct benefit. In light of the current theory and evidence on ESG investing, we accept that these conditions could be satisfied under the right circumstances, but we reject the claim that the duty of prudence either does or should require trustees to use ESG factors. We also consider how the duty of loyalty should apply to ESG investing by a trustee if authorized by the terms of a trust or a beneficiary or if it would be consistent with a charity’s purpose, clarifying with an analogy to whether a distribution would be permissible under similar circumstances. We conclude that applying the sole interest rule (as tempered by authorization and charitable purpose) to ESG investing is normatively sound.

The Oxford Handbook of Fiduciary Law provides a comprehensive overview of critical topics in fiduciary law and theory through chapters authored by leading scholars. The Handbook opens with surveys of the many fields of law in which fiduciary duties arise, including agency law, trust law, corporate law, pension law, bankruptcy law, family law, employment law, legal representation, health care, and international law. Drawing on these surveys, the Handbook offers a synthetic analysis of fiduciary law's key concepts and principles. Chapters in the Handbook explore the defining features of fiduciary relationships, clarify the distinctive fiduciary duties that arise in these relationships, and identify the remedies available for breach of fiduciary duties. The volume also provides numerous comparative perspectives on fiduciary law from eminent legal historians and from scholars with deep expertise in a diverse array of the world's legal systems. Finally, the Handbook lays the groundwork for future research on fiduciary law and theory by highlighting cross-cutting themes, identifying persistent theoretical and practical challenges, and exploring how the field could be enriched through empirical analysis and interdisciplinary insights from economics, philosophy, and psychology. Unparalleled in its breadth and depth of coverage, The Oxford Handbook of Fiduciary Law represents an invaluable resource for practitioners, policymakers, scholars, and students in this essential field of law.